An IRS collection agent throws a word or phrase your way, and you have no idea what he is talking about.
As they say, it is all Greek to you. And too much is at stake to bluff your way through it.
A wrong move or misunderstanding could result in a levy on your bank account, wages, or seizure of assets.
How can you negotiate yourself out of trouble with the IRS if you don’t understand the language of IRS collection agents?
To even the playing field, here are the 10 of the most important terms you should know when you owe back taxes to the IRS:
1. IRS Revenue Officer. This is the highest-level IRS collection agent. A Revenue Officer will work in your town, and have greater enforcement tools at his collection than any other IRS collection agent. Many Revenue Officers like to start working on a case by making an unannounced visit to your home or office, often on a Friday or before a holiday weekend. They are often assigned cases of high value to the IRS – like unpaid unemployment taxes or situations with many years of unfiled tax returns and a long history of IRS tax debts.
A Revenue Officer’s job is to bring you into compliance with the filings, and determine how the taxes can be repaid. They want to work quickly, will set deadlines to provide the returns and financial statements, and have the power to levy your wages and accounts if there is a lack of cooperation. Revenue Officers also make the difficult seizures – houses, cars, business property, and retirement accounts – that other IRS collection agents cannot.
2. Automated Collection Service (also known as ACS). Essentially an IRS 1-800 telephone collection branch. You will never meet or see an IRS Automated Collection Service agent. For that matter, you will never talk to the same ACS agent twice. Every time you call, you will get a different agent, likely located at a different IRS location. Where you live has nothing to do with who you speak with at ACS as they are not local.
ACS collects taxes by sending out computer-generated IRS letters, ranging from a generic Balance Due letter to a Final Notice of Intent to Levy. Their goal is to have you call them in response to the letter on their 1-800 line, and then to discuss your case. ACS agents rarely make outbound phone calls, instead fielding yours.
Their collection powers are more limited than an IRS Revenue Officer – they do not seize house, cars, business property. Their focus is on liquid assets, like bank accounts and wages. They get their levy information from what you tell them and what is already in the IRS database from income reporting (W2s, 1099s).
3. Final Notice of Intent to Levy. Before a Revenue Officer or ACS can levy your property, they have to give you notice. That letter is called a Final Notice of Intent to Levy, and is most commonly identified in the upper-right hand corner by the IRS code of either LT11, L1058, or CP90. If the IRS has not sent out the Final Notice of Intent to Levy, you are protected and no assets can be levied.
If the IRS has sent out the intent to levy, law gives us a 30 day right to appeal the levy action. The appeal stops the IRS from levying, and also transfers the case from the IRS collection division to its office of appeals for resolution on alternatives to levying.
If you owe the IRS, the first thing you want to do is check if the IRS has sent its Final Notice of Intent to Levy. IRS internal account transcripts can be obtained that will show if the intent to levy notice has been issued, and what appeal rights you have to stop the levy action. The Final Notice of Intent to Levy is is the most important letter the IRS will send you.
4. Collection Due Process Appeal (CDP). If the Final Notice of Intent to Levy is the most important letter the IRS collection division sends, then the Collection Due Process Appeal is your most potent weapon in response. This what the IRS calls the appeal you can file in response to the intent to levy.
Known by the IRS by the acronym CDP, it bears repeating that the appeal stops levies, moves a collection case out of the hands of an IRS Revenue Officer or Automated Collection Service agent, and even gives the US Tax Court the ability to review any decision made by the IRS to levy your property before it can take place. And, in many situations, negotiating with IRS appeals can be beneficial as they are trained to settle cases, and have no levy authority, which can be a different mindset from IRS collection agents.
5. Levy and lien. A levy is an IRS taking of your property – it could be levying your wages, bank accounts, or even real or personal property.
A tax lien is IRS security against your assets. It does not result in any immediate taking of your property. For example, if you own a house, and the IRS files a tax lien, the lien is like a mortgage on your house. If your house is worth $200,000, and you owe $180,000 to your bank, then the IRS lien would be worth $20,000. That being said, the IRS rarely seizes a personal residence – it is just bad policy and can make for bad publicity. The lien would also show on your credit report, as a mark against it.
6. IRS Collection Financial Statements, Form 433A, 433B and 433F. An IRS collection agent will likely require you to complete one of these forms and disclose where you work, bank, and list your assets, income, and living expenses.
Completion of these forms is essential to an IRS collection agent’s job – they use them to determine how the taxes can be collected. Revenue Officer’s use the Form 433A for individuals, and the 433B for businesses. Automated Collection Service uses the 433F, which is much shorter than the 433A and 433B and requires fewer financial and personal disclosures.
If you do not cooperate with an IRS request for a financial statement, chances are good the IRS collection agent will levy your wages, accounts or property for not cooperating.
7. Collection Financial Standards. When reviewing your collection financial statement, the IRS will apply their own internal guidelines to crunch numbers to determine how much they think you can pay. These guidelines are called Collection Financial Standards, and have the effect of putting you on an IRS-mandated budget for living expenses.
The limitations include caps on the amount you spend every month on food, entertainment, rent, utilities, car payments, auto operating expenses, and credit cards. In other words, your financial reality can be flipped upside down by the IRS National Collection Standards, which can create an IRS demand for a payment greater than what you can actually afford.
8. Offer in Compromise. Heavily marketed on TV and radio as the holy grail of IRS negotiations, an offer in compromise is not nearly as simple as it is made to sound.
As part of an offer in compromise investigation, the IRS will require that you complete a Form 433A or 433B, and will apply their Collection Financial Standards to your living expenses. As such, it is extremely important to be well-versed in the IRS offer in compromise guidelines before jumping in.
Also, know that the caps the IRS puts on your living expenses alone are often enough for them to justify a rejection of your settlement offer. The IRS accepts about 35% of the offers it gets, so you can get to yes, but need to know the guidelines to get there.
9. IRS Form 9297, Summary of Taxpayer Contact. In additional to Form 433A or 433B, an IRS Revenue Officer will likely request that you provide additional documentation supporting your financial condition. This demand is usually made by the R.O. by sending you Form 9297, Summary of Taxpayer Contact.
The 9297 will list everything the Revenue Officer wants, and deadlines for compliance and disclosure. The list could include copies of your bank statements, paystubs, and verification of living expenses, including statements that show the amount you owe on any loans (house, auto, etc.).
If you have unfiled tax returns, the 9297 will set a date for the filing to be completed. If you are self-employed, there will also be an immediate demand for you to get into compliance with estimated tax payments and Federal employment tax deposits.
Revenue Officers need to move their cases forward; that means a missed deadline from the Form 9297 delays their work, and will usually result in a levy if additional time is not negotiated.
10. Collection Statute Expiration Date (CSED). Even if you do not qualify for an offer in compromise, you will eventually have relief from your IRS debt from the expiration of time. By law, the IRS has 10 years to collect a tax debt.
The 10 years starts when the IRS places your debt on its books. This can be when you file a return, are audited, or, if you did not file a return, when the IRS files a return for you (known as a Substitute for Return). After the 10 years is up, the IRS will make an entry into their internal database and give you a credit for the unpaid balance, bringing the amount you owe to zero.
IRS account transcripts can be obtained verifying that the collection statute has expired, and that IRS records reflect your account as cleared. Also, when the CSED expires, your tax liens do, too.
Now, armed with essential IRS collection terms, you can level the playing field and negotiate with confidence. There is no reason to go into an IRS negotiation blind to how they work, talk, and go about their business of collecting taxes.